Bankrupt Auto Companies? (December 8, 2008)

Congress recently rejected the request by the “Big 3” (GM, Chrysler and Ford) auto companies who came in with their palms out and instead asked them to go out and come back with a plan in hand. Congress already passed a Plan. The Plan is part of Chapter 11 of Title 11, the reorganization chapter of the Bankruptcy Code. The Code, in particular Section 365, provides the debtor with the power to avoid contracts and leases when necessary. This provision is discussed in previous “e-ssays.”

Roam an auto show. Kick the tires. Open the doors. Sit on the seats. Turn the buttons. Toggle the switches. Slam the doors. Look under the hood. Peek in the trunk. Check the workmanship. Read the specs. Scrutinize the consumer reviews. Check recall notices. Repeat.

Georgetown, Princeton and Cambridge make better cars. In Kentucky, Indiana and Ontario (Canada), three of the Toyota plants in North America. The management in Detroit has designed and manufactured lousy and energy-inefficient vehicles for decades and made Detroit irrelevant. The trio from Detroit did not propose real compensation concessions to match the pay packages of their far more successful counterparts in Tokyo and Munich and elsewhere.

Southern Republican senators smell an opportunity to bust a union, the United Autoworkers of America (UAW), and support the non-union plants in their states. However, the employees in the non-union states only receive the wages they receive because they can point to the higher wages possible if they were to unionize like their brethren in the North. Cripple the UAW and undermine wages. The Civil War, the War Between the States, the War between the Red States and the Blue States, the War between the North and the South continues unabated.

The Bankruptcy Code still provides the most promising legal mechanism to reorganize (organize?) the automobile companies. The logic of Chapter 11 is that a going concern has additional value that should be preserved. The problem seems to be that Chapter 11 may be inadequate under the circumstances. The amount of the proposed bailout is squandered by the U.S. in a few days in Iraq.

The Trillion Dollar Bailout/Bribe of Wall Street was and is a travesty. Is a bailout of the Big 3 necessary or appropriate?